Testing Limits to Policy Reversal: Evidence from Indian Privatizations
AbstractWe examine the effect of regime change on privatization using the 2004 election surprise in India. The pro-reform BJP was unexpectedly defeated by a less reformist coalition. Stock prices of government-controlled companies that had been slated for definite privatization by the BJP dropped by 3.5 percent relative to private firms. Surprisingly, government-controlled companies that were only under study for possible privatization fell by 7.5 percent relative to private firms. We interpret this as evidence of investor belief of policy irreversibility, where reforms may reach a stage beyond which future regimes have difficulty reversing those policies. Further analysis suggests that layoffs, combined with the privatization announcement, served as a credible commitment to the government's privatization agenda.
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Date of creation: Sep 2007
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Find related papers by JEL classification:
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
- H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
- L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-09-30 (All new papers)
- NEP-CWA-2007-09-30 (Central & Western Asia)
- NEP-DEV-2007-09-30 (Development)
- NEP-TRA-2007-09-30 (Transition Economics)
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